Cram Down

A cram down (or 'washout round') is an extreme form of down round where new investors negotiate terms so favorable to themselves that existing shareholders — especially common stockholders like founders and employees — are severely diluted or wiped out. Cram downs typically occur when a company is in financial distress and desperately needs capital: the new investor has enormous leverage. Mechanics: new investors receive a very low valuation plus preferred terms (high liquidation preferences, heavy anti-dilution), resulting in new investors owning 70-90% of the post-round company. Existing preferred holders may be diluted below their anti-dilution protection thresholds. For founders and employees, cram downs can make their equity essentially worthless even if the company ultimately succeeds.